The federal government subsidizes private economic activity in a great many ways and, as we will see, the typical credit program generates a specific benefit or subsidy to the recipients. The common characteristic of all subsidies - credit programs and other aids - is that they constitute a wedge between the cost to the seller of a product or service and the price paid by the buyer. A subsidy may go to producers or to consumers, or it may be shared. The general intent of a subsidy is to encourage some activity, usually to cause more to be produced or consumed than would result from the unaided operations of the competitive marketplace.
Types of Government Credit Programs
1.Direct Loans by Federal Departments and Agencies
2.Loans Guaranteed by Federal Departments and Agencies
3.Loans by Givernment-Sponsored Enterprises (GSES)
A basic function that financial institutions are supposed to perform is assigning appropritate risk premiums to borrowers of dofferent financial strengths.
Summery of Econmic Effects
Contrary to popular opinion, government credit programs are not costless, either to the Treasury or to citizens in general.
1. The economic cost.
2. The initial fiscal cost.
3. The ultimate fiscal cost.
Most fundamentally, an economic climate more conducive to provate saving and investment would reduce the need for private borrowers to seek federal credit assistance in the first place. Such a climate would be fostered by a tax system that tilts in favor of saving tather than consumption and a fiscal policy that avoids the Treasury deficits whose financing competes with pricate boeeowers.
source: Business and Government in the Global Marketplace (7 edition Murray L. Weidenbaum)
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